Debt to Income Ratio
Debt to Income Ratio matters when buyers are trying to get qualified for a loan. Lowering your DTI ratio may be necessary in order to qualify for a mortgage. Many lenders will require a debt-to-income ratio under 36 percent. Learn how to calculate your debt to income ratio in order to know what steps need to be taken to prepare to buy a home using financing.
How to Calculate Debt to Income Ratio
To calculate debt to income ratio, divide the total outgoing monthly debt by the total incoming monthly income, then multiple by 100. For example, someone working 40 hours a week making a wage of 11.15 an hour which is the minimum wage for Missouri works 160 hours a month, so take 160 hours time wage of 11.15, and you will get a monthly income of 1784. The next step is to take what you pay out in monthly debt , for this example let us say there is a 75 credit card payment, a 200 car payment, and a 400 mortage payment, so the total monthly debt would be 625. 625 monthly debit divided by 1784 monthly income equals .3503363229 times 100 equals DTI of 35. 03363229.
Another way to think of this is to take your monthly income and multiply this by .35 . The amount you come up with shows you what your monthly debt allowance would be. Example 1784 multiplied times .35 equals 624.40 so your debit needs to be no more than this to have a DTI of 35 percent.
Let us now give an example of a couple, that both work full-time jobs at 40 hours a week at minimum wage jobs at 11.15 hourly. The monthly hours per person would be 160, so let us multiple the hours of 160 times the rate wage of 11. 15 which gives us $1784 times 2 persons equals $3586.
Now take $3586 and multiply 35 percent which is 0.35, this will give you $1248.80. So your total monthly debt should not be over $1248.80 in order to have a Debt to Income Ratio of 35 percent. If your monthly debt is higher, consider paying down to decrease the monthly outgoing funds. If you can’t do that, you need to add monthly income.
Improve Debt to Income Ratio
You can improve your DTI either by decreasing monthly debt or adding monthly income or both at the same time. It is a good idea to know your DTI before you call a lender to get prequalified for a mortgage.
To summarize, lower your DTI to qualify for a mortgage by decreasing monthly debt or increasing monthly income!
In addition to lowering your DTI, work on increasing credit scores as well. Increase credit scores by having on-time payments and lowering your credit usage. Strive to only use 30 percent or less of your available credit amount.
Click here for a great informational site to learn more about DTI.